ACCA PM · Chapter 5
Cost-volume-profit analysis MCQs with Answers
10 multiple-choice questions on Cost-volume-profit analysis for ACCA PM Performance Management. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A single-product company sells its product for $45 with variable cost of $27 per unit. Fixed costs are $108,000 and budgeted sales are 7,500 units. What is the margin of safety as a percentage of budgeted sales?
- A) 25%
- B) 80%
- C) 20%
- D) 40%
Show answer & explanation
Answer: C) 20%
Contribution per unit = $45 - $27 = $18. Breakeven = $108,000 / $18 = 6,000 units. Margin of safety = (7,500 - 6,000) / 7,500 = 20%.
Question 2
Kappa Co sells two products in the constant unit ratio of 3 units of A to 2 units of B. Product A sells for $20 with variable cost of $12 per unit. Product B sells for $30 with variable cost of $15 per unit. Fixed costs are $186,000 per period. What is the weighted average contribution to sales ratio?
- A) 44%
- B) 50%
- C) 45%
- D) 40%
Show answer & explanation
Answer: C) 45%
For a batch of 3 A and 2 B: contribution = (3 x $8) + (2 x $15) = $54; revenue = (3 x $20) + (2 x $30) = $120. Weighted average C/S ratio = $54 / $120 = 45%. Weighting the individual C/S ratios (40% and 50%) by units sold, rather than by revenue, gives the wrong answer of 44%.
Question 3
Kappa Co sells two products in the constant unit ratio of 3 units of A to 2 units of B. Product A sells for $20 with variable cost of $12 per unit. Product B sells for $30 with variable cost of $15 per unit. Fixed costs are $186,000 per period. What is the breakeven sales revenue (to the nearest $)?
- A) $465,000
- B) $413,333
- C) $372,000
- D) $430,556
Show answer & explanation
Answer: B) $413,333
Weighted average C/S ratio = $54 / $120 = 0.45. Breakeven revenue = fixed costs / C/S ratio = $186,000 / 0.45 = $413,333 (rounded).
Question 4
Kappa Co sells two products in the constant unit ratio of 3 units of A to 2 units of B. Product A sells for $20 with variable cost of $12 per unit. Product B sells for $30 with variable cost of $15 per unit. Fixed costs are $186,000 per period. How many units of product B must be sold to break even (to the nearest unit)?
- A) 10,333 units
- B) 6,889 units
- C) 17,222 units
- D) 8,611 units
Show answer & explanation
Answer: B) 6,889 units
Contribution per batch (3A + 2B) = $54. Breakeven batches = $186,000 / $54 = 3444.44. Units of B = 3444.44 x 2 = 6,889 units (rounded). Units of A would be 10,333.
Question 5
Kappa Co sells two products in the constant unit ratio of 3 units of A to 2 units of B. Product A sells for $20 with variable cost of $12 per unit. Product B sells for $30 with variable cost of $15 per unit. Fixed costs are $186,000 per period. Budgeted sales revenue, in the standard mix, is $500,000. What is the margin of safety as a percentage of budgeted sales (to one decimal place)?
- A) 21.0%
- B) 82.7%
- C) 45.0%
- D) 17.3%
Show answer & explanation
Answer: D) 17.3%
Breakeven revenue = $186,000 / 0.45 = $413,333. Margin of safety = ($500,000 - $413,333) / $500,000 = 17.3%. The margin of safety is always expressed relative to budgeted sales, not breakeven sales.
Question 6
Kappa Co sells two products in the constant unit ratio of 3 units of A to 2 units of B. Product A sells for $20 with variable cost of $12 per unit. Product B sells for $30 with variable cost of $15 per unit. Fixed costs are $186,000 per period. What sales revenue is needed, in the standard mix, to earn a profit of $45,000 (to the nearest $)?
- A) $458,333
- B) $313,333
- C) $513,333
- D) $100,000
Show answer & explanation
Answer: C) $513,333
Required contribution = fixed costs + target profit = $186,000 + $45,000 = $231,000. Required revenue = $231,000 / 0.45 = $513,333 (rounded). Simply adding the profit to breakeven revenue ignores the fact that each $1 of sales only adds $0.45 of contribution.
Question 7
A company prepares a multi-product profit-volume chart that plots each product individually. In what order should the products be plotted?
- A) In order of decreasing sales revenue
- B) In order of increasing contribution per unit
- C) In order of decreasing contribution to sales ratio, starting with the highest
- D) In alphabetical order of product name
Show answer & explanation
Answer: C) In order of decreasing contribution to sales ratio, starting with the highest
On a multi-product P/V chart the products are plotted in order of their C/S ratios, highest first, so the line rises most steeply at the start. This produces a bow-shaped line above the straight line joining the start and end points, which represents the average mix.
Question 8
Which of the following is an assumption underlying multi-product cost-volume-profit analysis?
- A) The sales mix remains constant at all levels of activity
- B) Fixed costs increase in steps as activity rises
- C) Selling prices fall as more units are sold
- D) Variable cost per unit changes with the volume of output
Show answer & explanation
Answer: A) The sales mix remains constant at all levels of activity
Multi-product CVP analysis uses a weighted average contribution, which is only valid if products are sold in a constant mix. It also assumes constant selling prices, constant variable costs per unit and fixed costs that do not change within the relevant range.
Question 9
On a traditional breakeven chart, which of the following is true?
- A) The total cost line starts at the origin
- B) The sales revenue line starts at the level of fixed costs
- C) Profit is measured by the vertical distance between the fixed cost line and the sales revenue line
- D) The fixed cost line is drawn parallel to the horizontal (activity) axis
Show answer & explanation
Answer: D) The fixed cost line is drawn parallel to the horizontal (activity) axis
Fixed costs do not change with activity, so they are shown as a horizontal line. The total cost line starts at the fixed cost level on the vertical axis, the revenue line starts at the origin, and profit is the vertical gap between total revenue and total cost to the right of the breakeven point.
Question 10
A company sells two products. Product M has a contribution to sales ratio of 30% and product N a ratio of 55%. If the sales mix shifts towards product N while total revenue and fixed costs are unchanged, what will happen?
- A) The breakeven revenue will fall
- B) The breakeven revenue will rise
- C) The breakeven revenue will not change because fixed costs are unchanged
- D) Profit will fall because the mix has changed
Show answer & explanation
Answer: A) The breakeven revenue will fall
Shifting the mix towards the product with the higher C/S ratio increases the weighted average C/S ratio. Breakeven revenue equals fixed costs divided by the weighted C/S ratio, so it falls, and profit at the same total revenue rises.